AGL Energy has asked the government for 90 days' reprieve so it can prepare a plan in which it would replace the lost electricity generation caused by the closure of the Liddell power station in NSW, rather than keep it open or sell it.

But under pressure from the government, he also agreed to put to the board a proposal for AGL to either keep operating the old coal-fired power station for another five years or sell it to another operator who is prepared to keep it running.

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Following a 90-minute meeting on Monday afternoon in Canberra, Energy Minister Josh Frydenberg said the government would only accept AGL's replacement plan if the power were as reliable as coal in that it could be supplied upon demand. Nor could it be less reliable or more expensive than the electricity being generated by Liddell, a 50-year-old ailing coal plant. This, the government believes, will corner AGL into having to keep the plant open or sell it.

"What was clear from today's discussion is that dispatchable power is key. Meeting the supply shortfall from the closure of Liddell is key, and the company have now agreed to take to their board the option of continuing with Liddell beyond 2022 or selling it to another party," Mr Frydenberg said.

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"The Prime Minister will not allow a shortfall in the market to occur that has been identified by the Australian Energy Market Operator, recognising that it is in consumer interest to have a stable and affordable power system."

Showing reluctance

Mr Vesey and his executives told Mr Frydenberg and Prime Minister Malcolm Turnbull that the company's clear preference was to close Liddell in 2022 as scheduled, and redevelop the site as a clean energy hub, which could include gas-fired power. He asked for 90 days to develop a plan to replace the lost power from new generation sources.

"I was asked to take to the AGL board the government's request to continue the operation of Liddell post-2022 for five years and/or sell Liddell, which I agreed to do," Mr Vesey said after the meeting.

But he was clearly reluctant to do so.

Malcolm Turnbull and Josh Frydenberg say they will not allow a shortfall in the energy market to occur. Alex Ellinghausen

"AGL has previously advised the market that replacement of capacity will likely be provided by a mix of load sharing and firming from gas peaking plant, demand response, pumped hydro and batteries," he said.

"In this environment, we just don't see new development of coal as economically rational, even before factoring in a carbon cost."

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Mr Vesey said Liddell was an unreliable option, saying the company had spent $123 million upgrading the plant since it bought it in 2015 from the NSW government.

"Despite this investment, during the February 2017 heatwave, two units from Liddell were out of the market due to unforeseeable boiler tube leaks. As a result, there was not enough energy in the system and NSW experienced blackouts in parts of the state," he said.

AGL's Andy Vesey said on Monday after meeting Prime Minister Malcolm Turnbull that he would put the idea of extending Liddell to his board even though it was "economically irrational". Andrew Meares

"As Liddell approaches the end of its life in 2022, it will likely experience more unanticipated outages, which is why we will spend a further $159 million to improve reliability at Liddell before it closes."

Simplest option

But the government told AGL that its preference was to keep Liddell running for another five years because that was the simplest, easiest and cheapest option.

"But we haven't seen their plan. They have asked for 90 days to work on that, and we look forward to seeing that when it is complete," Mr Frydenberg said.

He said at no stage did AGL discuss with the government compensation or other incentives if it agreed to sell Liddell or keep it running.

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Liddell power station in the Hunter Valley. Nick Moir

The AEMO report released last week said the closure of Liddell would create a 1000-megawatt shortfall in reliable baseload generation in NSW and Victoria and until renewable and other clean energy technology was sufficiently developed, the preferred option would be to extend the life of the power plant.

AEMO said there was neither the time nor market incentive to build a new, so-called clean coal-fired power station.

The stand-off with AGL came as Mr Turnbull in Parliament indicated he would fight a push by the Nationals to torpedo any clean energy target (CET) or other policy that in any way subsidised a particular form of power.

"The policies of the Coalition government are determined by the cabinet and the Coalition," he said.

"We certainly respect decisions and recommendations, resolutions from our various party conferences [but] policy is determined by the members of Parliament here.

"That has always been the case."

'Sanitised' motion

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The Nationals' annual federal conference passed a motion on Sunday opposing the CET as modelled by Chief Scientist Alan Finkel or any other policy that subsidises any energy source beyond 2020.

The motion also agreed to freeze the Renewable Energy Target at 23 per cent in 2020, to not subsidise renewables or any other energy source beyond then but "to treat all forms of power on their merits". Emissions reduction was not mentioned.

While not binding on the federal parliamentary party, the motion, passed at the Nationals annual federal council meeting, was supported by several National MPs.

Sources said afterwards the motion was "sanitised" to ensure it would pass but, in reality, Nationals' MPs had no intention of voting for any policy like a CET.

The motion specified opposition to the CET as modelled by Dr Finkel. It does not include so-called clean coal as an energy source.

This is despite Dr Finkel saying in his report that CET would lower prices and improve stability of supply because it would end the decade-long investment drought in energy caused by policy paralysis at a federal level.

Finance Minister Mathias Cormann backed the Prime Minister.

"Our focus as a Coalition is making sure energy prices can be as a low as possible, that energy security is as high as possible.

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"I am very confident we will achieve a landing point " which, he said, would lower prices, increase security and enable Australia to meet its 2030 emissions reduction targets.

A CET would ensure a certain percentage of energy each year be generated from designated clean energy sources such as renewables and gas.

Mr Turnbull said: "I am very committed to ensuring that we meet our international obligations and lower our emissions.

"We all like clean energy. But you've got to make sure the transition is done responsibly."

Phillip Coorey is The Australian Financial Review's Political Editor based in Canberra. He is a two-time winner of the Paul Lyneham award for press gallery excellence. Connect with Phillip on Facebook and Twitter. Email Phillip at pcoorey@afr.com